TL;DR – At 9% GST, most Singaporeans can expect to pay less than $27.60 more a month.
Goods and Services Tax (GST) is a tax on domestic consumption. The tax is paid when money is spent on goods or services, including imports. It is a multi-stage tax which is collected at every stage of the production and distribution chain.
Q: What is the history of GST rates in Singapore?
1994: GST introduced with rate of 3%
2003: GST rate revised to 4%
2004: GST rate revised to 5%
2007: GST rate revised to 7%
So, when the GST hike is introduced at the earliest possible time (in 2022), it would mean that GST rate has remained unchanged for 15 years.
Q: When is the Government planning to increase GST from 7% to 9%?
Budget 2018: Minister for Finance Heng Swee Keat had announced then that GST would be raised to 9% between 2021 and 2025, but the exact timing for the increase will depend on the state of the economy, growth in expenditure and the buoyancy of existing taxes.
Budget 2020: Deputy Prime Minister and Minister for Finance Heng Swee Keat had announced that GST hike will not take effect in 2021, but will still be raised by 2025.
Q: Why did the Government decide not to raise GST in 2021?
The decision was largely due to Singapore’s weaker economic conditions and the impact from the Covid-19 virus outbreak.
But DPM Heng also said in his Budget speech on Tuesday (Feb 18) that the Government will not be able to postpone the increase indefinitely and that a hike “will still be needed by 2025”.
Q: Why do we need to raise GST rate to 9%?
Short answer: It’s to help fund expenditure in areas like healthcare, security and other social spending.
For the long answer, we will focus mostly on healthcare because we’re expecting an almost exponential increase in expenditure in this area. Yes, due to our ageing population.
Healthcare expenditure has been increasing over the years. Did you know that Government spending on healthcare was S$3.9 billion in 2011 and this jumped to S$10.2 billion in 2018?
Don’t forget we have an ageing population and we can expect increasing healthcare needs from age-related illnesses and also chronic diseases as people will be living longer and longer. This will mean immediately in the foreseeable decade, we need new healthcare capacity to meet rising demand and investing in new medical technologies to improve care quality.
Today, the average annual Government healthcare subsidies received by an elderly person is more than six times that of a younger person, or about S$4,500 more. Our trend of ageing population means that by 2030, the number of elderly will increase by about 450,000 to 900,000, so you can imagine the increase in subsidies that will be needed.
Already in the Government’s healthcare plans include building six more general and community hospitals, four new polyclinics and more nursing homes and eldercare centres within the next five years.
So exactly how much money do we need in the coming decade?
A lot of money, basically. Right now, our average annual healthcare spending is 2.2% of GDP, and it will raise to 3% of GDP in the next decade. In today’s dollars, this 0.8 percentage point increase is about S$3.6 billion.
With heightened security threats, there is also a need for increased spending on security, including preventing and fighting against online attacks and radicalisation.
In order to cater to a growing population and to continue to carve a liveable city to enhance quality of life for Singaporeans, spending on infrastructure projects has grown from S$8.5 billion in FY11 to S$20 billion in FY18. We can only expect this number to continue to grow.
In the next decade, we will need to spend more to develop new infrastructure such as expanding the rail network by more than 100km, rejuvenate ageing infrastructure and build Changi Airport Terminal 5, Tuas Port and the Kuala Lumpur-Singapore High Speed Rail network.
Q: How will the hike to 9% be implemented?
The government plans to implement the GST hike in a “progressive manner”. This means the Government will continue to absorb GST on publicly subsidised education and healthcare, and enhance the permanent GST Voucher scheme when the hike kicks in. The enhanced GST Voucher scheme will provide more help to lower-income households and seniors.
There will also be an offset package for a period of time to help Singaporeans adjust to the GST increase, with lower- and middle-income households receiving more support.
Q: Who should pay?
It’s easy for people to see that we have increasing needs, especially in healthcare in view of our ageing population. It is even easy for people to understand the need to raise taxes. But it is harder to deal with the question, “Why (raise) GST?”
DPM Heng had said that a broad-based tax like the GST is an “appropriate and responsible way” to pay for major societal needs like healthcare spending.
“Such spending benefits all Singaporeans and so it is fair for everyone to bear some part of the costs. This is about all of us taking shared responsibility to pay for our needs and our society’s needs, and sharing in the effort to provide for them.”
“This is ultimately about us collectively chipping in to look after the healthcare needs of our families. Each generation must pay for its own spending.”
Q: Why not tap on the country’s financial reserves?
Actually that’s what we have been doing since 2008! Singaporeans have been benefiting via the Net Investment Returns framework since it was introduced in 2008. This started out with the reserves managed by GIC and the Monetary Authority of Singapore (MAS), and later Temasek in 2015.
Over the last 10 years since its implementation, the NIR contribution (NIRC) has more than doubled from S$7 billion in FY2009 to an estimated S$15.9 billion in FY2018. Yes, we have been tapping on more and more from NIRC to the extent that it is now the largest contributor to Singapore’s revenues – more than any single tax.
Singapore currently spends up to 50 per cent of expected net investment returns, and the remainder goes to the reserves.
The Government prefers to adopt a more prudent and also forward- and far-sighted stance when it comes to our reserves. Remember this, the more we tap into our reserves now, the less we have to add to the principal sum of the reserves. This will lead to the principal sum becoming stagnant over time, and the impact of this can potentially be significant given that our budget now relies on the NIRC as our largest source of revenue.
DPM Heng cautioned during Budget 2018 that if the Government spent more than the investment returns, it will eat into the country’s nest egg and, in time, the diminished reserves will generate a progressively smaller stream of income in the years that follow until eventually the reserves are exhausted.
Q: So GST is not the top revenue contributor for the Government?
Nope! In fact, it is not even in the top three! Here’s the estimated revenue sources for FY2019.
If you’re curious about the revenue contribution pattern through the years, here’s a summary of the revenue versus the expenditure.
As you can see above, our NIRC has been the top contributor for a while now, followed by corporate income tax revenue, personal income tax revenue and then GST.
In the meantime, the pressure to spend more on different needs of the different segments in our population has continued to swell over the years. We will know we need to invest in our people, both young, middle-aged and old, we need to do more for the elderly and the poor, we need to do more for middle-income families, we also need to help working mothers, single mothers, etc etc etc. And what about infrastructure needs? And what about strengthening our security?
My point is everything costs money and everyone wants more money. So where’s the money going to come from?
Q: How do other countries fund their expenditure?
Most governments in the world get their revenue from taxes, and many borrow too. As DPM Heng shared, many government borrow money to fund programmes for the current generation, and they service the interest at around 2% of the GDP every year. So in a way, the future generation is paying for debts taken by governments that benefit the past and current generation.
Singapore does it differently. We have our strong reserves and we tap on the NIRC to help fund our spending. This means that the money earned and invested by past generations are funding current generation’s spending. So likewise, when it’s our time now, we should do the right thing and do it the Singapore way. Don’t spend everything, save some for the future generations.
In case you’re curious, here’s where we stand in terms of income taxes vis-a-vis other countries’. We have a very competitive tax regime and we encourage work and enterprise by keeping our tax rates low.
Q: How much GST revenue have we collected?
For FY2018 and FY2019, the Government collected slightly under $12 billion in GST. But here’s a look at the GST collection through the years.
Q: How much more GST will an average Singaporean pay with the hike?
Yes, we can understand that nobody wants to pay more taxes. But let’s be rational about things. So once the GST rate is adjusted from 7% to 9%, how much more in GST will we really be paying? Financial portal, Dollars and Sense, has done up a very easy-to-understand explainer on this, so I’ll just lift their example here:
As you can see, the average household in Singapore spends about $4,156 a month, not including imputed rental of owner-occupied accommodation. Given that the average household size is 3.01, it works out to around $1,380 of expenditure per person each month.
At 7% GST, Singaporeans would be paying $96.60 in total GST a month on average from the goods and services they spent on. Obviously, this is an average figure, so a large portion of Singaporeans would probably be paying less, while a smaller group of Singaporeans who purchase more and higher value goods and services are paying much more.
At 9% GST, Singaporeans would be paying $124.20 in total GST on average a month, which represents a $27.60 increase a month, and a $331.20 increase over an entire year.
Q: How much help will Singaporeans get from the Government to offset the impact of the GST hike?
There are four special packages announced in Budget 2020, and one of them is the GST Assurance Package. So while the hike will only kick in after 2021, $6 billion has been set aside this year to help cushion the impact when the increase does take effect.
The Budget’s new GST Assurance Package means all adult Singaporeans will get cash payouts of between $700 and $1,600 over five years, so most households will get enough to offset at least five years’ worth of additional GST expenses.
Those living in one- to three-room flats will get enough to offset about 10 years’ worth.
DPM Heng elaborated,
“To illustrate, a family of four with a combined income of S$6,000 living in a four-room HDB flat can receive in total about S$7,000 in offsets over five years. This includes cash of about S$4,000.”
“This is the Government’s way of ensuring our system of taxes and transfers remains progressive and supports Singaporeans through the change, while enabling us to fund our future needs in a sustainable way.”
Q: So is GST a regressive or progressive tax?
Short answer, yes, GST on its own is a regressive tax. So you will hear a lot of people ranting about the Government for raising GST and burdening the poor.
First off, what does “regressive tax” even mean?
A tax is regressive when it takes a higher proportion of the income of those on low incomes, compared to those on higher incomes. A broad based consumption tax with no exceptions is regressive because it applies uniformly, and those on lower incomes spend a higher proportion of their income on goods and services than those on higher incomes.
But although GST is regressive in nature, we must bear in mind that the GST system in Singapore has always been uniquely structured in a progressive way with the introduction of GST offset packages (permanent GST Voucher scheme for low-income households and seniors).
So ya, Singapore has made a regressive tax progressive.
MOF has even taken pains to explain this in great detail here.
Although GST is regressive in nature, it forms part of Singapore’s overall tax and benefits system, which is progressive. We redistribute tax revenues through a progressive system of taxes and transfers.
Those with higher income spend more. They therefore pay more GST and contribute more to GST revenue. The top 10% of individuals who pay Personal Income Tax (PIT) contribute about 80% of PIT.
In Singapore, the permanent GST Voucher works together with GST. The GST Voucher scheme helps lower- and middle-income Singaporeans with cash support and utility rebates. The elderly also receive MediSave top-ups. Together with other social schemes, lower- and middle-income households receive more in benefits than the taxes they pay. This ensures that Singapore’s system of taxes and transfers is a fair and progressive one. Under our progressive system of taxes and transfers, the lower-income and seniors effectively pay less because of GST offsets.
So in nutshell, we need to look at whether we pay more taxes than we do receive social transfers.
Q: Any more questions?